John Cameron's personal blog

Serious discussion about your financial position now - and in the future.

Two Problems With Retirement Planning – Smooth Curves And Straight Lines

Often when you go to a financial planner to plan your retirement, they will give you a graph to show how your capital might fare over a period.

The process is fairly simple. You start with an amount of capital, it earns interest, dividends and growth over time, and this grows the amount of capital. Deduct the amount you draw to live on, and you are left with a balance. Then, draw a graph of the balance each year, and there is your future capital mapped out.

However, this comes with at least 2 serious drawbacks.

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Are You Growing Or Harvesting Your Investments?

Just as crops are first grown, then harvested, so is wealth.

Think of all the years of putting money away into superannuation. Money is regularly added, and this can be thought of as fertiliser. It helps the crop grow. Then there is the performance of the investments, which grows over time, with the occasional setback (much like a crop can experience setbacks due to weather, disease etc.).

All of a sudden it is time to harvest. Just as a well tended crop of fruit trees can go on producing fruit year after year, so to with a well structured investment portfolio. 

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How Much Has It Earned? – Beware The Pitfalls When Comparing Investment Returns.

We have all been taught to look at the percentage rate of return when comparing investments.

However, in many situations it is important to look deeper than just the annual percentage return.

This is especially so in the case of retirement.

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Who Spotted The Recent Black Swan Event?

Black Swan Events are things that happen, but nobody sees them coming. Mostly the term relates to events in the financial world, where markets change suddenly, without apparent warning. Examples include the GFC, and the 1987 sharemarket crash.

Black Swan events can also occur in our personal lives, such as when a close family member is struck down by a sudden illness, out of the blue and with no warning. A current example is diver Taneka Kovchenko, who had to withdraw from the Commonwealth Games because of a medical diagnosis that “one dive gone wrong could turn her into a paraplegic”.

Then there is the example of Tim Paine. Who, 12 months ago would have tipped him to be Australia’s captain? He had a record as an outstanding wicketkeeper, but his career was hampered by serious injury (a broken finger that took several surgeries to heal), and at the start of the season he was playing for Tasmania as a batsman, and seemed to be on the way out of first class cricket.

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A New Approach to Retirement Income

Most of the principles, ideas and guidelines around how to structure retirement income, have been developed by theoreticians, and are often impractical and out of touch.

Now, a financial planner with decades of practical experience, has produced a booklet that looks at the performance of different asset classes over almost 50 years. The main conclusion   –   there is no “best” answer across all times. It depends.

To download a copy, go to: http://www.blackswanevent.com.au/landing-page-lump-sum 

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